Year-End Tax Planning Strategies for Small Businesses

Year-End Tax Planning Strategies for Small Businesses

The last quarter of the year is your window to take concrete steps that lower your tax bill. Waiting until tax filing season means you have already missed most opportunities. Here are the strategies that actually move the needle.

Review Your Projected Income

Before you implement any strategy, you need to know where you stand. Pull your year-to-date profit and loss statement. Project your revenue and expenses through December 31. Estimate your total taxable income for the year.

If your income is higher than expected, focus on strategies that reduce taxable income. If your income is lower than expected -- perhaps lower than next year's projected income -- consider strategies that accelerate income into the current year to take advantage of the lower bracket.

Accelerate Deductions

Prepay Expenses

If you use the cash method of accounting, expenses are deductible when paid. Prepay the following before December 31:

• January rent (if your lease allows)
• Insurance premiums due in early January
• Annual software subscriptions
• Membership and association dues
• Supplies you will use in Q1

Buy Equipment and Assets

Purchases of business equipment, vehicles, furniture, computers, and software placed in service before December 31 qualify for Section 179 or bonus depreciation. You can deduct the full cost in the current year.

The Section 179 limit is $1,160,000 for 2023. Bonus depreciation is 80% for 2023, stepping down to 60% in 2024. If you were planning to buy equipment in January, buying it in December saves you a year of waiting for the deduction.

Make Retirement Contributions

Maximize contributions to your SEP IRA, SIMPLE IRA, or Solo 401(k) before the applicable deadline. For a Solo 401(k), employee deferrals must be made by December 31. Employer contributions for SEP and Solo 401(k) plans can be made until the tax filing deadline.

Defer Income

If you expect to be in a lower tax bracket next year, or simply want to push income into the next year:

• Delay sending invoices in December so payment arrives in January
• Hold off on closing deals until after January 1
• If you receive year-end bonuses or payments, negotiate to receive them in January

This only works for cash-basis taxpayers. Accrual-basis taxpayers recognize income when earned, regardless of when payment is received.

Maximize the QBI Deduction

The Qualified Business Income (QBI) deduction allows pass-through business owners to deduct up to 20% of qualified business income. The deduction phases out for specified service trades or businesses (consulting, health care, law, accounting) when taxable income exceeds $182,100 (single) or $364,200 (married filing jointly) for 2023.

If you are near the phase-out threshold, strategies to reduce taxable income -- retirement contributions, accelerated deductions, charitable contributions -- can keep you under the limit and preserve the full 20% deduction.

Charitable Contributions

C corporations can deduct charitable contributions up to 10% of taxable income. For pass-through entities, charitable deductions flow to the owner's personal return. If you are considering significant charitable giving, make contributions before December 31.

Donating appreciated property (stock, real estate) can be particularly tax-efficient. You deduct the fair market value and avoid paying capital gains tax on the appreciation.

Write Off Bad Debts

Review your accounts receivable. If any invoices are clearly uncollectible, write them off as bad debts before year-end. For accrual-basis taxpayers, this creates a deduction. Cash-basis taxpayers generally cannot deduct bad debts since the income was never recorded.

Review Your Entity Structure

Year-end is the time to evaluate whether your business structure is still optimal. If you are a sole proprietor or single-member LLC earning over $50,000-$60,000 in net profit, an S corporation election may save you significant self-employment tax starting next year. The election (Form 2553) is generally due by March 15 of the year you want it to take effect, but reviewing and deciding now gives you time to plan.

Harvest Tax Losses

If your business holds investments, review your portfolio for unrealized losses. Selling positions at a loss before December 31 allows you to offset capital gains with capital losses, and deduct up to $3,000 of net capital losses against ordinary income.

Be aware of the wash sale rule -- if you buy the same or substantially identical security within 30 days before or after the sale, the loss is disallowed.

Adjust Estimated Tax Payments

If your income is higher than you estimated earlier in the year, increase your Q4 estimated tax payment to avoid underpayment penalties. If you also have W-2 income, increasing withholding on your W-2 in Q4 is even better -- IRS treats withholding as paid evenly throughout the year, so it can help offset earlier quarters.

Year-End Tax Checklist

• [ ] Review year-to-date P&L and project full-year income
• [ ] Identify equipment or asset purchases to make before December 31
• [ ] Prepay eligible January expenses
• [ ] Maximize retirement plan contributions
• [ ] Review accounts receivable for bad debt write-offs
• [ ] Evaluate entity structure for next year
• [ ] Check QBI deduction eligibility and phase-out thresholds
• [ ] Adjust Q4 estimated tax payment if needed
• [ ] Organize records and receipts for tax filing
• [ ] Schedule a meeting with your CPA before year-end

The best tax planning happens in October through December, not in April. Take action now while you still have time to affect this year's return.